What buy-to-let properties are best to invest in?

Our guide for potential landlords looking to make an investment in buy-to-let property

The buy-to-let property market is a much more sophisticated place to invest than it used to be ten or more years ago, and first-time landlords now face a bewildering stack of investment options.

For example, one sector - the student market - has seen huge expansion recently and last year the number of students at UK universities was at an all-time high of nearly 570,000, while last year £3.7 billion was invested in new stock.(1) It also features returns on investment that have remained steady while other parts of the market have been more volatile.

But this is only one part of the UK’s dynamic buy-to-let market, which includes different hues of tenant, types of property and locations, all of which require different levels of effort and offer varying profit and revenue opportunities.

Here’s our guide to the different property options available to landlords.

New builds

Overview

The UK is undergoing a minor boom in new-build home construction now as the government battles to ramp up UK house building.(2) Latest government figures show the number of new-builds completed (to June) this year is 153,330 up by 13% compared to the same period last year. These are mostly houses (73%) and the remainder apartments, concentrated in urban areas.(3)

Pros

New builds are easier to maintain because a lot of the equipment, such as the oven and central heating system, is likely to be covered by their manufactures’ guarantee, plus most new homes’ building quality is covered by a ten-year NHBC construction guarantee.

Cons

Running costs can be higher as common areas such as landings (or roofs) may require maintenance further down the line and owners will have to chip in to pay the bill – this all comes under higher service charges. Some large new-build developments can also create over-supply temporarily in some areas.

HMOs (Houses of Multiple Occupation)

Overview

The UK’s 500,000 HMOs5 or ‘multi-let properties’ as they are also known, are homes in which three or more people live who are not from the same household but share facilities. They were once seen as an inferior type of rented accommodation. But the modern needs of professionals working short-term contracts or working weekdays in city centres has driven investment expansion in this sector.(6)

Pros

An HMO tends to offer higher yields than other types of property because they contain more tenants, and therefore can generate more rent per square foot. While normal buy-to-let properties generate average gross yields of approximately 6% on average, HMO yields range from nine to 12%.(7)

Cons

The safety and other legal requirements faced by HMO landlords are higher than those of traditional rented properties, and therefore costs are higher. Rent is also often collected weekly.

Shared houses

Overview

There are two reasons why more people are sharing rented homes. Firstly, for many renters it is too expensive, particularly in London, to rent by themselves – 57% of sharers say ‘financial reasons’ are the main reason they do it.(7) Secondly, more people are renting later into life. For example, the number of flat sharers aged between 35 and 44 years old increased by 186% between 2009 and 2014.(8)

Pros

Houses or apartments in which a group of friends or acquaintances rent out a property together and each sign the tenancy agreement and are therefore ‘jointly and severally’ responsible for the rent, so in theory rental income is more stable and reliable.

Cons

Tenants can come and go a lot as people find new jobs or start relationships and move out.

Family homes

Overview

Families renting homes for the long term were once a small part of the overall rental market and usually within the social, rather than private, sector. But changes in government housing policy, and the high price of getting on the property ladder, has increased the number of families renting their homes. Families with children are now the largest group within the private rented sector (48%), overtaking young single renters and couples (9). A third of landlords quizzed by one leading bank (10) recently said family homes were a key growth area for the future.

Pros

Couples or families renting properties tend to want security and therefore are more likely to sign up to longer tenancies. If they are good tenants, this means security of income for the landlord.

Cons

Property rented by families with children are much more likely to feature heavy wear and tear and, therefore, maintenance and repair issues will crop up more often.

Corporate lets

Overview

Prime corporate rental properties are a niche market found almost exclusively in the UK’s key city centres and require both specialist management skills – tenants expect high standards of service – and capital expenditure. But despite this 12% of landlords canvassed recently said they were an area of growth for rental values in the future (9).

Pros

Rents tend to be higher for properties rented out to company employees and rent payments are more guaranteed because the company is paying for it. They also provide a good quality tenant, where behaviour is usually better – because their employer is paying the rent.

Cons

Tenancy contracts tend to be shorter than other kinds of rental property and therefore there’s a risk of void periods in between tenancies. Also, corporate tenants usually expect a higher quality of fixture and fitting than traditional, longer-term tenants.

Student lets

Pros

Student lets are one of the fastest-growing rental sectors in the UK (see intro at top), as are the returns on investment if you invest wisely. And some student tenants, particularly overseas ones, will pay each term’s rent in advance to help manage their budgets.

Cons

Students are better behaved than they used to be, but they are still likely to be young and living in their first home away from their parents. Repair and maintenance issues can arise more often, therefore.

Are you thinking about letting your property? Whether you are a first-time landlord with a single property, or a seasoned professional with a large portfolio, we can help.

Find your local Winkworth office here and speak to your local Winkworth lettings team for advice.

Sources:

Empiric Student Property PLC, UK REIT – The UK Market report, 2017.

House of Common Briefing Paper, Building the new private rented sector, June 2017, Summary.

DCLG House building: new build dwelling, England: 24 August 2017.

English Housing Surveys, 2016/2008

BBC website, The lowest rung of the ladder? 2015.

Property Reporter website, Demand for HMOs sees 150% YOY rise. 2016.

Shawbrook – the UK HMO Market, 2017.

Guardian website, The other generation rent. September 2015.

National Landlords Association, Families now most common household in private rented sector, June 2016.

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